Greenhouse gas abatement — toward Pareto-optimal decisions under uncertainty

Abstract

This paper examines the economic logic of integrated assessment — balancing the costs against the benefits of greenhouse gas abatement. “Stylized facts” are employed in a multiregion computable general equilibrium model with a public good. The percentage shares of global emissions are determined outside the model — based upon some form of international agreement — and emission rights are tradeable between regions. The analysis is confined to Pareto-optimal (cooperative) solutions. We focus on the sensitivity of initial decisions to low-probability, high-consequence scenarios associated with cumulative emissions. For simplicity, there are only two regions, two tradeable goods, two time periods, and two states-of-world. With the particular form of public good model adopted here (production rather than utility function impacts), it turns out that a Pareto-optimal hedging strategy is indepedent of the emission shares allocated to each region. Equity issues may be separated from those of economic efficiency. Similar results extend to cases in which there are additional regions, tradeable goods, time periods, and states-of-world.